‘Challenging Environment’ Ahead For Munis This Year – LPL

By Michael Aneiro

Strategists are still skeptical about the muni market’s prospects for the rest of this year. Anthony Valeri, fixed income strategist at LPL Financial, today reiterates his cautious stance on munis, which hasn’t changed much since his outlook two months ago. Valeri says just as muni performance benefited from the unexpected first-half drop in Treasury yields, it’s going to be subject to the prevailing winds of the broader bond market in the second half, and most pundits expect rates to rise. Here’s Valeri today:

Ultimately, we believe municipals will be more sensitive to the path of the taxable bond market after a strong first half. On a positive note, moderate valuations coupled with below average new issuance means that municipal bonds may be more insensitive to periods of weakness. We continue to believe the taxable bond market is likely the main catalyst to the next move in municipal bond prices — be it higher, lower, or sideways. However, absent a new bout of economic weakness, we see additional municipal price gains as limited and the now lower level of yields implies less return and also reduced protection against rising interest rates. A combination of intermediate and longer-term municipals to help limit interest rate sensitivity is an option to invest in the more challenging environment we see over the remainder of 2014.

Lots of analysts have predicted badthings ahead for the muni market in the latter half of this year after such a stellar first half, but so far munis have continued to muddle along without any major problems, as long as the words “Puerto Rico” aren’t involved.